A lacklustre week that ended on August 31 saw world commodity prices, especially energy and metals decline slightly.

Crude prices eased a bit over the week. All base metals were down week on week with tin prices declining by a hefty 7.3 per cent and nickel by 3.2 per cent.

Precious metals were hit too with gold going down by 1.1 per cent while silver managed to hold on. Platinum and palladium were down too.

The agricultural sector, however, posted broad-based gains in the aftermath of supply downgrades resulting from weather aberrations.

Federal Reserve Chairman Ben Bernanke said in a speech that the central bank would act as needed to strengthen economic recovery but did not explicitly signal any imminent move.

Prices had risen sharply in the previous week on expectation of further quantitative easing; but QE3 was not to be unless the US macro data deteriorated further to justify policy action.

So, the big question is whether the price rally would be sustained or will soon begin to correct. Clearly, the crude market is driven by tightening fundamentals and geopolitics, while the agricultural markets are driven by supply downgrades caused by bad weather primarily in the US Midwest as well as Black Sea region and India.

So, the risk is tilted to the upside for these markets.

Anticipation of QE3 is helping boost the sluggish precious metals market.

However, the market is not without concerns. Cash is still king. Investors are still cautious.

Flow of poor data from China recently has added to the uncertainty. Leading indicators do not evoke much confidence. So, commodity markets are likely to continue to struggle to find a trigger for price action.

Gold: Not unexpectedly, gold prices have begun to slowly weaken after the initial enthusiasm over anticipated QE3 petered out.

Prices have managed to hold above $1,600 an ounce, but it is only a matter of time before they decline further simply because neither investor interest nor physical demand is helpful.

Many experts believe the Fed will refrain from further quantitative easing especially considering a relatively strong start to Q3 key macro-economic indicators in the US.

In London on Friday, gold PM Fix was $1,649/oz. down from the previous day’s $1,661/oz. Silver edged lower with Friday AM Fix at $30.52/oz versus previous day’s $30.66/oz.

From a physical demand perspective, the Indian market shows no signs of pick up despite entering the strong buying season.

Elevated or unaffordable prices have kept jewellery buyers away.

Near-drought conditions are sure to hurt rural incomes and rural demand. Price elasticity of demand is at play.

At the same time, the benefit of a fall in the overseas gold prices in dollar terms is most unlikely to be available to India as the rupee is most unlikely to gain.

If anything, the rupee may weaken further by up to 5 per cent from the current levels.

According to some technical analysts, there is reason to be bullish on gold and one can look for buying interest near 1,640 to underpin a move toward 1,700.

Above this would fan bullish tendency toward 1,740. Closing above 31.30 in silver confirms a bullish view toward the 33.30 area. The medium-term outlook is neutral.

Base metals: The complex continues to display lacklustre performance as macro data are not exactly helpful.

There has been no policy action by the US Fed or ECB. On the other hand, the focus remains on China.

There is little evidence of any tightening in the Chinese base metals market, but with the manufacturing index turning weak, the downside risks are increasing.

So, some kind of policy action may become inevitable.

On the LME on Friday, copper cash closed at $7,606 a tonne and aluminium at $1,884/t.

Lead prices have gained by about 2 per cent over the week and by 10 per cent from the low of end-June. LME stocks have fallen.

Consumption demand for this base metal in China is strong with battery and e-bike production.

Overall, the base metals performance over the rest of the year remains largely tied to developments in China at a macro and at a metal-specific level. Some decisive triggers are necessary without which the complex will remain constrained.

There is the possibility of some short covering rallies in advance of key policy events.

According to technical analysts, September seasonally fits in with bearish view for aluminium and copper.

A move lower in the range toward 7,280 and then 7,215 for copper is a possibility; and for aluminium 1,827.

Beyond that the targets are 7,100 and 1,776 respectively. The medium-term outlook is bearish.

Crude: The global oil market remains tight with limited spare capacity and is highly exposed to accidents and weather-related losses.

The undercurrent of geopolitical concerns adds to the uncertainty.

Any or all of these can potentially disrupt supplies. So, the market is constantly on the edge; and any sign of improvement in the global macro data is sure to have price implication.

(This article was published on September 2, 2012)
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